My experience with family businesses indicates, that many fail to consider the importance of business strategy, as they believe it to be something complicated that is way beyond them. Sheer nonsense. It is many times a case of a mental barrier. At it’s core business strategy is simple. It’s a plan to create value. The way a business plans to create value is the business strategy. Simple right?

Of course, any business strategy needs to rest on data. So it is obvious that it needs a deep analysis of financials – the margins and profitability, the return on invested capital – all this is the result of strategy, the endpoint, the consequence. So where do we start?

Business strategy is about looking forward, seeing the future, planning for the future. A good place to start that is understanding how much value do we create in the first place – value for customers, value for employees and value for suppliers. But what is value?

Simply put, value is the difference between willingness to pay and willingness to sell. At the top, we have willingness to pay and at the bottom, we have willingness to sell, and the difference between the two is the value that the company creates. So what is willingness to pay and what is willingness to sell?

Willingness to pay describes customers. It’s the most a customer would ever pay for a product or a service. Now, any business is not going to give away its products, of course, and so prices have to be below willingness to pay, otherwise people will not buy. Value for customers is the distance between the actual prices and their willingness to pay…the greater the distance in the customer’s favour the greater value is being created in the customer’s mind.

Willingness to sell is a little less intuitive than willingness to pay. Willingness to sell is the least amount of compensation that an employee would accept and still work for this particular company. Value for employees is the difference between compensation and their willingness to sell. It’s a measure of the quality between what the person is looking for in work and what the company can offer.

So total value created is the difference between willingness to pay and willingness to sell, and then it gets split three ways. Some of it goes to customers. That’s the difference between willingness to pay in price. Some of it goes to employees, that’s the difference between willingness to sell and compensation, and the middle wedge – that’s the margin for the company. That’s the financial success. In the end, how profitable an organisation reflects the amount of overall value creation. So one natural question is, what are the ways a business can raise the willingness to pay? Please consider three options.

The first one is the quality of your product or your service, where quality can mean very different things to different people. But the higher the quality, the more appealing the product, the more appealing to service, the higher is willingness to pay. And then there are two different ways to also increase willingness to pay that are a little less obvious. The first one is with the help of complements. A complement is a product or a service that supports willingness to pay of something else. Think razor, razorblade. Think printer and cartridges, think espresso and espresso machines, and espresso capsules. And the third is network effects. For some products in some situations, the more popular the product is, the more widespread its adoption, the greater my willingness to pay. Fashion brands work just like that.

What about willingness to sell? There are really two ways to be more attractive in the market for talent. The first one is increasing wages. The moment a business pays higher wages it is of course going to be more competitive in the marketplace for talent. The second option that is based on making the job a better job, by offering more attractive working conditions i.e. a better training plan, better and clearer career paths, more flexible work conditions. Whenever a company makes the job a better job, willingness to sell is going to go down. And so at the beginning you might think, these things are really the same. If a business pays more money, it will create more value for its employees, and if it makes a job a better job, the lower willingness to sell does the same thing. There is however a big difference.

If a business pays higher wages, that just shifts value from the company to the staff, to the employees. There’s no value created. Value is just redistributed between the company and the people who work for the company. If a business makes work more attractive, if the job is a better job, willingness to sell goes down, and that actually creates value.

Some may think that business strategy is difficult, cumbersome or even irrelevant. However, by using some reasoning and simple examples in the above, I hope, you can see that it is not. It is a necessity for any business to thrive. That is why, in the upcoming accredited Award in leading a family business course we have a whole module dedicated to business strategy. Click HERE to read more about this course and to register. There are ONLY A FEW REMAINING PLACES AVAILABLE!